How to cover your Retirement healthcare costs

by | Apr 15, 2016 | Retirement Planning

“HealthCare Costs for Couples in Retirement Rise to an estimated $245,000” claims a Fidelity Investments report. If you are approaching Retirement, this is an important financial concern that must be addressed. So, what do you do? How do you cover these expenses? Do you have a plan?

One solution:  Healthcare Savings Account (a.k.a. HSA)

For example, in the year 2016, a married couple at the age of 55 can save up to $7,750 per year and save paying taxes on the contribution. Such contributions can be invested, grow tax-free and can be withdrawn tax-free as well if used for medical expenses.

Now, putting it another way and with some math behind it: If a married couple, at the age of 55, starts saving $7,750 per year for ten years and earn 5% growth, their HSA nest egg at 65 could be $102,353! Moreover, if the same couple continues to grow the nest egg until their age 80, again assuming 5% growth, they will have $212,785 in their HSA account. Very close to Fidelity’s estimated healthcare costs. Isn’t it? The couple now can help themselves by using this money towards medical expenses in their late retirement stage and do not pay a dime in taxes!

HSA Contribution, growth, and withdrawals used for medical expenses-all tax-free all the way

Yes, tax-free all the way! Do you see how good saving in HSA is to cover your healthcare costs in Retirement?
Obviously, the devil is in the details. You need answers to questions such as: whether you are eligible, how much to contribute, who contributes, where to invest, and what if you do not need all that money for your medical expenses. So, let us get started:

Who is eligible?

Now, here is how you know if you are eligible:
1. You do not qualify if you are enrolled in Medicare.
2. You are NOT eligible if someone else can claim you as dependent on their tax return
3. You are eligible if the only health plan you are covered is a High Deductible Health Plan (a.k.a. HDHP Plan)
All right, this is great. So, what is considered an HDHP plan? An HDHP plan is a health plan with set minimum deductibles and maximum out of pocket expenses. These limits are indexed yearly. In other words, the limits change from year to year. For example, the following applies for the year 2016.
Tax Filing Status Minimum Deductible Maximum Out of Pocket
Single $1,300 $6,550
Married $2,600 $13,100

How much can you contribute?

Remember, you get a federal tax deduction on what you contribute. So, there are limits on how much you can contribute. Again, the limits on whether you are single or married, and they are indexed yearly. Also, if you are 55 or older, you are eligible for a catch-up contribution that is tax-deductible. So, let us see how all this adds up for the year 2016.

Tax Filing Status                       Contribution Limit

Single                                                                               $3,350
Married                                                                             $6,750
Catch-up 55 or older                                                        $1,000

Who contributes?

First of all, an HSA qualified plan could be sponsored by your employer, or you could purchase it privately. That said, if the plan is employer-sponsored, contributions can come either from your employer or yourself. Even if your employer contributes to your HSA account, the funds belong to you immediately after the contribution, and you will have full control over the money. In other words, there is no vesting period whatsoever, and if you leave employment, you can take the money with you. Isn’t that great?
However, depending on who contributes, there is one key point to note. If your employer contributes to your HSA account, the contributions are NOT subject to Federal Insurance Contributions Act tax (FICA) or Medicare taxes. On the other hand, if you contribute to your HSA account, you are required to pay FICA and Medicare taxes (in most cases).

Where can you invest the money?

Funds in an HSA account can be invested very similar to the way you invest funds in an Individual Retirement Account (a.k.a. IRA). While the specific investment options depend on where your HSA account is located, you will typically have choices to invest in stocks/bonds/mutual funds/index funds, etc.

What happens if you do not use the money for medical expenses?

If you do not use the money in the HSA for “qualified” medical expenses, you have four situations to manage:
1. If you are under the age of 65, you will pay a penalty of 20% and also pay taxes on the withdrawal.
2. If you are over age 65, you will NOT pay the penalty, but will have to pay taxes on the withdrawal.
3. If you pass away, and your spouse is the beneficiary, he/she can continue to use the money towards their qualified medical expenses.
4. If you pass away, and someone other than your spouse is the beneficiary, HSA stops acting as HSA and the balance in the HSA account will become taxable income for your beneficiary.

So, what you think? Are you concerned how to fund your Retirement healthcare costs? Will you consider a Healthcare Savings Account based on this discussion? I specialize in Financial Planning for Professionals who are in their Mid-Career or approaching Retirement. Schedule an appointment with me, and I will be glad to advise.

About me

Vid Ponnapalli

Vid Ponnapalli, MS, CFP®, EA

I provide customized Financial Planning and Investment Management services for Generation X professionals.

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